Memorandum to the Hon’ble Finance Minister
on ‘Food Subsidies’
25th May 2005, New Delhi
National Common Minimum Programme (NCMP) of the Government,
inter alia, states:
UPA government will strengthen the public distribution system
(PDS) particularly in the poorest and backward blocks of
schemes to reach foodgrains to the most destitute and infirm
will be launched. Grain banks in chronically food-scarce
areas will be established. Antyodaya cards for all households
at risk of hunger will be introduced.
UPA government will bring about major improvements in the
functioning of the Food Corporation of India (FCI) to control
inefficiencies that increase the food subsidy burden.
subsidies will be targeted sharply at the poor and the truly
needy like small and marginal farmers, farm labour and the
objectives of food subsidies in India are to maintain price
stability; provide support to poor; and ensure adequate
returns to small and marginal farmers.
subsidies in India comprises:
to farmers through minimum support prices (MSPs) and purchase
operations of the Food Corporation of India;
subsidies through the public distribution system, and
Subsidies to FCI to cover all its costs.
to the Ministry of Finance report on ‘Central Government
Subsidies’, the food subsidy bill has gone up by 10.5 times
from Rs.2450 crore in 1990-91 to Rs.25,800 crore in 2003-04.
As a proportion of GDP, it has gone up from 0.43 to 0.93,
over the same period.
main benefits of food subsidies are food security provided
to citizens, particularly the poor, and incentives to farmers
to keep foodgrains production at a comfortable level. However,
there are distortions in the way food subsidies are delivered,
leading to mounting food subsidy bills, without commensurate
benefits to target beneficiaries.
has been estimated that the cost of transferring a rupee
to the poor through the PDS is Rs.6.68 and that administrative
costs account for 85% of the total expenditure. Between
1957-90, the administrative costs increased by 274%. Government
studies of the PDS suggest that only 25% of the grains actually
reach the poor.
note critically reviews the policy options suggested in
the report prepared by the Ministry of Finance, with the
aim of ensuring that subsidies are transparent, well
targeted, and suitably designed for effective implementation
without any leakages.
Subsidies to FCI to cover its costs
made in the report
of the FCI are open-ended (i.e. it has to accept
all the grains that are sold to it at the declared
the issue price and the purchase price are linked,
higher purchase prices result in higher issue
prices. With relative high MSPs, procurement has
been high and off-take low resulting in a build-up
of stocks, adding to the subsidy bill.
a large part of the marketed surplus in FCI warehouses,
lower market supply exerts upward pressure on
prices in the open market, neutralising much of
the consumer benefits that subsidy provides.
run the excessive stocks down, foodgrains are
often exported by providing exporters, foodgrains
at near BPL prices.
MSP should correspond to the CACP-determined cost
(in other words, reduce MSP)
operations should not be open-ended. Before every
sowing season, procurement targets should be fixed.
FCI should suspend purchase operations once targets
system of price insurance may be developed. The
scheme should be self-financing and without any
subsidy obligation. This can operate in conjunction
with the purchase operations to benefit those
farmers who miss out on the opportunity of selling
their surplus at the support price because of
the close-ended purchase operations.
suggestions to reduce MSP and make purchase operations
close-ended will certainly reduce the subsidy
bill. However, it would not ensure that the subsidy
is targeted sharply at the truly needy i.e. small
and marginal farmers.
Another way to reduce subsidy bill is by not using
the same instrument to serve conflicting objectives.
Presently, the food subsidy policy seeks to achieve
through the MSP-PDS operations, the conflicting
objectives of ensuring remunerative price to farmers
and providing foodgrains to poor at affordable
prices. By implication, this entails a huge gap
between the purchase price and issue price, and
consequently a larger subsidy bill.
of costs to FCI should be based on normative unit
costs and actual quantity involved, instead of
reimbursement on actual basis.
functions of the FCI can be outsourced.
towards decentralisation of procurement to usher
in greater efficiency in the purchase and distribution
role of the Food Corporation of India need to
be clearly defined, particularly in the context
of decentralisation of procurement.
is need to specify how individual state targets
would be determined in the context of decentralisation
of FCI purchases in a few States facilitates tax
exportation by some of these States. For instance,
Punjab and Haryana impose mandi fees on
the purchases of foodgrains. With FCI paying such
taxes, the tax gets exported to consumers in other
tendency for tax exportation by some States needs
to be curbed, by appropriate legislation. Since
it is easy to identify the States that indulge
in this practice, differential purchase prices
can be worked out for individual States.
has been involved in price support operations
for jowar, maize and bajra. The quantities are
becoming larger each year and storage losses are
heavy because of limited shelf life. It has proved
to be difficult to sell these coarse grains through
the PDS and the bulk of the procurement has been
sold, at heavy loss, as cattle feed.
made in the report
coupons may be introduced to initially cover only
the additional subsidy given to the below poverty
line (BPL) families over and above that for above
poverty line (APL), while continuing with the
exclusive PDS outlets.
BPL families would then pay the PDS outlet the
same price as the APL families, but partly with
coupons and partly in cash.
the system could be extended to any foodgrains
seller even outside the fair price shops.
on one hand the suggestions seek to eliminate
the dual system of prices in PDS, at the same
time a dual system for distributing foodgrains
is sought for BPL families – food coupons as well
as ration cards. This may create distortions.
the system is extended to foodgrains seller outside
the fair price shops, no separate ration shops
would be required.
are both inclusion and exclusion errors, and large-scale
diversion of foodgrains from the PDS/TPDS network.
to a study by Tata Economic Consultancy Services,
about a third of TDPS supplies were diverted and
did not reach the intended beneficiaries.
NSS data on PDS consumption are generally lower
than the official data on PDS supply. This may
reflect leakages from the PDS.
of the foodgrains is pilfered and sold in the
market or damaged due to poor storage conditions.
in PDS can be brought in by:
coarse grains consumed generally by poor alone
Locate PDS shops in areas where the poor live.
PDS grain purchase on a weekly basis rather than
suggested to plug leakages (food coupon system
for BPL families) and improve targeting (self-targeting)
would have very limited impact in addressing the
coupon system, as suggested, will not help solving
the problem of foodgrains being sold in the black
grains should not be included in PDS operations
since their shelf life is limited and they are
available at low prices to the poor. Though effective
for better self-targeting, the suggestion is not
worth implementing given the associated costs.
monitoring and vigilance system proposed in the
TPDS guidelines, which were to involve local Panchayati
Raj institutions (PRIs), has not become operational.
CAG beneficiary study found non-awareness of entitlements
among consumers. The study reported the absence
of grievance redressal systems.
should be involved in design, implementation and
monitoring of location-specific food distribution/security
systems. They should be entrusted with the task
of identifying the beneficiaries. They should
be roped in to create awareness among consumers
about their entitlements under the programme.
redressal system should be established.
should conduct social audit of the schemes, and
report misuse of funds.
Subsidies to Farmers
made in the report
purchase operations are mainly confined to five
states – Punjab, Haryana, Western UP, Andhra Pradesh,
and Chhattisgarh. This has led to concentration
of farmers’ subsidy to these States. In fact,
a large percentage of farmers in these states
are not poor.
attention to wheat and rice has distorted the
cropping pattern of farmers in favour of these
two foodgrains alone.
decentralisation of procurement would ensure that
benefits are distributed more evenly across the
country, but how will it ensure that these benefits
are actually availed by small and marginal farmers
and not cornered by rich farmers.
is a need to involve local level agencies such
as PRIs/NGOs to ensure proper identification of
beneficiaries and monitoring of the scheme.
Procurement System Proposed
present food subsidy policy uses the same instrument to
achieve the conflicting objectives of ensuring remunerative
price to farmers and providing the foodgrains so procured,
to poor at affordable prices. By implication, this entails
a huge gap between the purchase price and issue price, and
consequently a larger subsidy bill.
the following two-tier procurement system is suggested:
operations to provide support to small and marginal farmers
and use the foodgrains so procured to maintain buffer
stock to ensure price stability. The buffer stock
requirement should be determined well in advance. The
procurement process should be decentralised and FCI should
act as the main coordinating agency. The MSP operations
should extend to agriculturally underdeveloped regions,
which have a vast unexploited potential for agricultural
Procurement of foodgrains through competitive bidding
for distribution to poor. Since these foodgrains will
be distributed to poor at affordable price, competitive
bidding will minimise the cost of procuring of foodgrains
for the purpose. The management and coordination of the
system should be done by a state level agency, which should
determine the quantum of foodgrains to be procured based
on pre-defined criteria. Food stamps should be introduced
in certain areas. NGOs and other civil society organisations
should be roped in to create awareness among consumers
about their entitlements under the programme. A grievance
redressal system should be established.
a list of beneficiaries with their contacts, etc and make
it public (put it out on the website). Something along
the lines of Food for Work Programme in Andhra Pradesh.
the proposed system, the FCI’s role would be to provide
emergency buffer stock, the PDS part of its function could
be gradually eliminated with the expansion of food coupon
Note on Food Stamps
(Reference: “Food Stamps: A Model for India”, Discussion
Paper, Centre for Civil Society, November 2004)
Food stamps are used in many
countries all over the world. They are proven to be a cost
effective means to assure right quantity and quality of food
for all. Each food stamp specifies the money amount that can
be used to purchase approved food items from any regular or
approved shops in the market. The shopkeeper presents the
food stamps collected from the holders to the government to
get the equivalent amount of money. With technological
developments, countries have replaced paper food stamps with
smart cards or debit cards, drastically reducing transaction
costs, pilferage and corruption.
Food stamps provide an
alternative to the PDS to ensure supply of food to the poor
and the needy. Instead of putting grains in ration shops
under the PDS, food stamps put purchasing power directly in
the hands of the poor. The problem of foodstuff being sold
in the black market would disappear because first, no
separate ration shops need to be created since the food
stamps can be accepted by regular approved shops, and second
the shopkeeper would be able to collect food stamps only
after giving the ration to the people. Food stamps offer
better guarantee that the ration would reach the poor.
Poor targeting, excessive
procurement, storage and distribution costs, and leakages or
illegal diversions of subsidised grains are grave ills of
PDS. Under the food coupons system, the FCI’s role would be
only to provide emergency buffer stock, the PDS part of its
function could be eliminated. Getting rid of this whole
system would result in vast savings, which can be delivered
to the poor through the better-targeted food stamp system.
A concern about food stamps is
that it is a means of reducing the real value of subsidy.
Since food stamps entitle households to generally a fixed
value of purchase and not a fixed quantity, the criticism is
that with inflation, the real value in terms of grain that
can be purchased by the consumer falls. This concern can be
tackled by indexing the food stamps to the inflation rate.
There is a fear the stamps
will be sold and the money used to buy other things. A
related concern is the issue of black marketing. But there
isn’t much to stop a person from selling PDS grains to earn
some money. After all, the shopkeepers have been doing that
for so many years and selling the goods in the black market.
In order to keep this risk at minimum it is necessary to
ensure proper targeting of food stamps. Another way to
reduce this risk is to not make denominations of stamps very
big. With big denominations, beneficiaries wanting to space
purchase over time or to purchase in different stores will
need to cash food stamps.
Another concern relates to
forgery and fraud. Introducing adequate security elements
with regard to stamps and informing beneficiaries and food
suppliers that security elements are in place, can reduce
this problem. Introduction of rewards for detection of
forged stamps can also help. Food stamps should also be
dated in terms of redemption, which stops circulation for
long periods Security paper, which makes stamp forgery more
difficult, can be found in most central banks in developing
countries, supplied by international secure paper providers.
Printing houses are also available in Central Banks or other
private or public offices.
The cost to consumers of
picking up the stamps can be minimised by asking the
targeted beneficiaries to pick them up at the local post
office/ health centre. Similarly, they can also be redeemed
at the local post office/ bank.
Subsidies in India, Department of Economics Affairs,
Ministry of Finance, Government of India, December 2004
Agriculture Markets in India: Implications for Competition,
in Pradeep Mehta edited, “Towards a Functional Competition
Policy for India”, CUTS, Academic Foundation, 2005
Food Stamps: A Model for
India, Discussion Paper, Centre for Civil Society,
Das, Vidhya, Food Policy
and Tribal Poverty, Agragamee.org
Targeted Food Stamps, Business Line, August 3, 2004